‘Break-even’ math for Social Security

By Glenn Ruffenach

To serve the growing number of baby boomers approaching retirement, economists, educators, financial advisers and (of course) journalists are pumping out a steady stream of articles about Social Security and when to claim benefits. One recent entry can be found in the current issue of the Journal of Financial Planning, under the title “When to Start Collecting Social Security Benefits: A Break-Even Analysis.” The article is geared primarily toward financial advisers – but it’s also a great primer for individuals who are beginning to wrestle with this critical decision.

Shutterstock.com

The author is Doug Lemons, a former senior official in the Social Security Administration. His focus is on figuring out “break-even” points—the age at which total Social Security income from two retirement-timing options is the same. This is another way of looking at the issue that bedevils many would-be retirees: Will I maximize my payouts by claiming Social Security early and collecting smaller paychecks for a longer period of time, or should I wait and begin collecting larger paychecks in the future? The earlier your break-even age is, the more theoretically likely it is that collecting early will work against you in the long run, since you’ll need to live longer on a smaller paycheck.

In some respects, the math is simple: Social Security calculates your benefit so that, whether you start collecting early or late, you will – at least in theory, based on life expectancy – receive about the same total payout over your lifetime. (The Social Security Administration itself can help walk you through possible scenarios with its “Retirement Planner.”)

Lemons, for his part, looks at three basic options: collecting benefits at age 62 (the earliest age possible for most individuals); full retirement age (which he pegs at 66); and age 70. (You can maximize your monthly check by waiting until age 70 to claim benefits, but you won’t gain anything by delaying beyond that point.) These options, moreover, don’t occur in a vacuum, either in real life or Lemons’s research—he factors in variables including inflation rates, return on investment and marginal tax rates.

His findings underscore the idea that collecting earlier, and getting a smaller paycheck, puts more strain on your other sources of retirement income. For example: For an individual worker who isn’t affected by Social Security’s “earnings test” (under which benefits are reduced above certain income levels), returns on investments “must generally exceed the rate of inflation by 5% or more to justify taking benefits at age 62 rather than at full retirement age.” For some, that could be a high bar to clear.

About Encore

Encore looks at the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities, needs and priorities of people saving for and living in retirement. Our lead blogger is editor Matthew Heimer, and frequent contributors include editor Amy Hoak, writer Catey Hill, and MarketWatch columnists Elizabeth O’Brien, Robert Powell and Andrea Coombes. Encore also features regular commentary from The Wall Street Journal retirement columnists Glenn Ruffenach and Anne Tergesen and the Director of the Center for Retirement Research at Boston College, Alicia H. Munnell.